File: Chapter 01 The Financial Services Industry: Depository

Institutions

Multiple Choice

[QUESTION]
A non-bank depository institution is also referred to as:
A. Drift.
B. Thrift.
C. Phrift.
D. Draft.
Answer: B
Level of difficulty: 1

[QUESTION]
Which of the following statements is true?
A. A non-bank depository institution is also referred to as drift.
B. A non-bank depository institution meets the legal definition of a
bank.
C. A non-bank depository institution undertakes exactly the same
activities like a bank.
D. A non-bank depository institution is also referred to as drift
and a non-bank depository institution undertakes exactly the same
activities like a bank .
E. None of the given answers.
Answer: E
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Authorised depository institutions are those that have been
granted an authority by the RBA to operate in Australia.
B. Authorised depository institutions are those that have been
granted an authority by APRA to operate in Australia.
C. Authorised depository institutions are those that have been
granted an authority by the Australian Government to operate in
Australia.
D. Authorised depository institutions are those that have been
granted an authority by ASIC to operate in Australia.
E. None of the given answers.
Answer: B
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Building societies are depository institutions.
B. Building societies usually operate on a cooperative basis.
C. In case of building societies the depositors are also members of
the society.
D. All of the given answers.
Answer: D
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Credit unions are mutual cooperative organisations.
B. Credit unions provide deposit facilities, personal and housing
loans and payments services to their members.
C. In case of credit unions the depositors are also members of the
society.

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D. Credit unions are mutual cooperative organisations and credit
unions provide deposit facilities, personal and housing loans and
payments services to their members.
E. Credit unions provide deposit facilities, personal and housing
loans and payments services to their members and in case of credit
unions the depositors are also members of the society.
Answer: D
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. An off-balance sheet item is recorded on the balance sheet of a
financial institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the
liability side of the balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset
side of the balance sheet when a contingent event occurs or at the
end of a financial period.
D. All of the given answers
Answer: B
Level of difficulty: 3

[QUESTION]
Which of the following is a reason for the increase in the number of
banks since 1985?
A. Relaxation of entry requirements into the Australian banking
industry.
B. Changes in the regulatory requirements of non-bank depository
institutions.
C. The need for a more sophisticated banking system in Australia.
D. Relaxation of entry requirements into the Australian banking
industry andchanges in the regulatory requirements of non-bank
depository institutions.
E. Changes in the regulatory requirements of non-bank depository
institutions and the need for a more sophisticated banking system in
Australia.
Answer: D
Level of difficulty: 2

[QUESTION]
Which of the following statements is true for the Australian banking
industry?
A. The Australian banking industry is highly concentrated.
B. There are five major banks in Australia, these being the big four
plus St George Bank.
C. The five major banks and regional banks offer a full range of
commercial and investment banking services.
D. All of the given answers.
Answer: D
Level of difficulty: 2

[QUESTION]
In which year did the Australian options market commenced trading?
A. 1975.
B. 1976.
C. 1977.
D. 1978.
Answer: B
Level of difficulty: 1

[QUESTION]

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A noteworthy event for the development of the Australian financial
system in 1977 was that:
A. The first ATM was installed.
B. Decimal currency was introduced.
C. The Australian Banking Industry Ombudsman scheme was established.
D. None of the given answers.
Answer: A
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. The 30/20 rule for life companies and superannuation funds was
abolished in 1984.
B. The 30/20 rule for life companies and superannuation funds was
introduced in 1961.
C. The 30/20 rule for life companies and superannuation funds
requires minimum investments in government securities.
D. All of the given answers.
Answer: D
Level of difficulty: 2
[QUESTION] Which of the following statements is true?
A. The return on equity is measured as net income divided by total
equity capital.
B. The return on equity is measured as interest income divided by
total equity capital.
C. The return on equity is measured as net interest income divided by
total equity capital.
D. The return on equity is measured as non-interest income divided by
total equity capital.
E. None of the given answers.
Answer: A
Level of difficulty: 2
[QUESTION] The return on equity can be calculated as:
A. Return on assets multiplied by the debt-to-equity ratio.
B. Profit margin multiplied by the asset utilisation multiplied by
the debt-to-equity ratio.
C. Profit margin divided by the asset utilisation multiplied by the
debt-to-equity ratio.
D. Profit margin divided by the asset utilisation multiplied by the
equity multiplier.
E. None of the given answers.
Answer: E
Level of difficulty: 4

[QUESTION]
Which of the following statements is true?
A. An institution’s return on assets can be calculated as net income
divided by total assets.
B. An institution’s return on assets can be calculated as the product
of the institution’s profit margin and asset utilisation.
C. An institution’s return on assets can be calculated as (net income
divided by total operating income) multiplied by (total operating
income divided by total assets).
D. All of the given answers.
Answer: D
Level of difficulty: 4

[QUESTION]
Assume an FI’s return on assets is 12% and its equity multiplier is
1.7. What is the FI’s return on equity (round to two decimals)?
A. 12% / 1.7 = 7.06%.

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B. 12% * 1.7 = 20.40%.
C. (12% / 100) / 1.7 = 0.07%.
D. (12% / 100) * 1.7 = 0.20%.
E. It is not possible to calculate the FI’s return with the given
information.
Answer: B
Level of difficulty: 3

[QUESTION]
Assume an FI’s return on assets is 12% and its profit margin is 10%.
What is the FI’s return on equity (round to two decimals)?
A. 12% / 10% = 1.20%.
B. 12% * 10% = 0.012%.
C. (12% * 100) / 10% = 120.00%.
D. (12% * 100) * 10% = 1.20%.
E. It is not possible to calculate the FI’s return with the given
information.
Answer: E
Level of difficulty: 3

[QUESTION]
Which of the following statements is true?
A. An FI’s return on equity measures the overall profitability of the
FI per dollar of equity.
B. An FI’s return on assets measures the overall profitability of the
FI per dollar of assets.
C. An FI’s profit margin measures the overall profitability of the FI
per dollar of equity.
D. An FI’s equity utilisation measures the overall profitability of
the FI per dollar of equity.
E. None of the given answers.
Answer: A
Level of difficulty: 1

[QUESTION]
Which of the following statements is true?
A. The equity multiplier measures the extent to which assets of the
FI are funded with equity relative to debt.
B. The equity multiplier measures the ability to pay expenses and
generate net income from interest and non-interest income.
C. The equity multiplier measures the amount of interest and non-
interest income generated per dollar of total equity capital.
D. The equity multiplier measures the overall profitability of the FI
per dollar of equity.
E. None of the given answers.
Answer: A
Level of difficulty: 4

[QUESTION]
The financial ratio that measures an FI’s ability to pay expenses and
to generate net income from interest and non-interest income is
called the:
A. Return on assets.
B. Asset multiplier.
C. Asset utilisation.
D. Profit margin.
Answer: D
Level of difficulty: 3

QUESTION
The term ‘spread’ refers to:

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A. The difference between an FI’s assets and liabilities.
B. The difference between an FI’s liabilities and equity.
C. The difference between an FI’s short-term lending rates and long-
term lending rates.
D. The difference between an FI’s lending and deposit rates.
Answer: D
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Capital adequacy regulations of banks were introduced in 1989.
B. Capital adequacy regulations require banks to hold, on average,
less capital for low-risk assets such as housing loans compared to
higher-risk assets such as commercial loans.
C. Capital adequacy regulations were abolished in 2000.
D. Capital adequacy regulations of banks were introduced in 1989 and
Capital adequacy regulations require banks to hold, on average, less
capital for low-risk assets such as housing loans compared to higher-
risk assets such as commercial loans
E. Capital adequacy regulations of banks were introduced in 1989,
Capital adequacy regulations require banks to hold, on average, less
capital for low-risk assets such as housing loans compared to higher-
risk assets such as commercial loans and Capital adequacy
regulations were abolished in 2000.
Answer: D
Level of difficulty: 3

[QUESTION]
The major reasons for the shift in the composition of bank lending
commitments from the retail market to the commercial market are:
A. The introduction of capital adequacy regulations in 1989.
B. The number of non-bank depository institutions that gained banking
authorities in the early 1990s.
C. The fact that commercial loans paid higher returns than housing
loans.
D. The fact that commercial loan volumes had been restricted by the
Government until 1990.
E. None of the given answers as the shift was from commercial loans
to housing loans.
Answer: E
Level of difficulty: 3
[QUESTION] Which of the following statements is true?
A. The market value of a swap (today) is the difference between the
face value of the cash flows expected to be received minus the face
value of cash flows expected to be paid.
B. The market value of a swap (today) is the difference between the
present value of the cash flows expected to be received minus the
face value of cash flows expected to be paid.
C. The book value of a swap (today) is the difference between the
market value of the cash flows expected to be received minus the
market value of cash flows expected to be paid.
D. The market value of a swap (today) is the difference between the
present value of the cash flows expected to be received minus the
present value of cash flows expected to be paid.
Answer: D
Level of difficulty: 5

[QUESTION]
Which of the following statements is true?
A. Off-balance-sheet transactions for Australian banks include direct
credit substitutes and interest rate derivative contracts.

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B. On-balance-sheet transactions for Australian banks include direct
futures and forward contracts.
C. Off-balance-sheet transactions for Australian banks include the
commercial loans and term-deposits.
D. On-balance-sheet transactions for Australian banks include direct
swap and option contracts.
E. All of the given answers.
Answer: A
Level of difficulty: 4

[QUESTION]
Which of the following statements is true?
A. The building society industry is highly concentrated with a low
number of societies holding a large percentage of assets.
B. The building society industry is highly concentrated with a large
number of societies holding a large percentage of assets.
C. The building society industry is not highly concentrated as a
large number of societies hold a large percentage of assets.
D. The building society industry is not highly concentrated as a
large number of societies hold a large percentage of assets.
E. None of the given answers.
Answer: A
Level of difficulty: 3

[QUESTION]
Which of the following statements is true?
A. The majority of players in terms of asset value in the Australian
financial system are credit unions.
B. The majority of players in terms of asset value in the Australian
financial system are building societies.
C. The majority of players in terms of asset value in the Australian
financial system are financial institutions.
D. The majority of players in terms of asset value in the Australian
financial system are superannuation funds.
E. None of the given answers, as total assets are equally distributed
across institutions.
Answer: C
Level of difficulty: 3

[QUESTION]
Which of the following statements is true?
A. During the 1960s and 1970s, the growth of building societies
ensured an increasing supply of funds for housing loans at reasonable
rates.
B. During the 1960s and 1970s, the credit union expansion ensured the
availability of relatively low cost unsecured and secured personal
loans.
C. During the 1960s and 1970s, regulatory constraints meant that
banks could not in general satisfy the demand for consumer credit.
D. All of the given answers.
Answer: D
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Deregulation of the banking system in the 1980s brought greater
competition from the banks.
B. D
C. Deregulation of the banking system in the 1980s resulted in loss
of market share by non-bank depository institutions.
D. Deregulation of the banking system in the 1980s brought greater

Test bank t/a Financial Institutions Management by Lange & Saunders et al 1-6
competition from the banks and B.
E. Deregulation of the banking system in the 1980s brought greater
competition from the banks and deregulation of the banking system in
the 1980s resulted in loss of market share by non-bank depository
institutions.
Answer: E
Level of difficulty: 3

[QUESTION]
In which way did building societies respond to the competitive
pressures resulting from the deregulation of the banking system in
the 1980s?
A. They engaged in mergers for efficiency reasons.
B. They adopted improved technology.
C. They diversified their products and activities.
D. They engaged in mergers for efficiency reasons.
E. All of the given answers.
Answer: E
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. In 2004, credit unions used mortgage brokers, while building
societies did not use mortgage brokers.
B. In 2004, building societies used mortgage brokers, while credit
unions did not use mortgage brokers.
C. In 2004, building societies and credit unions used mortgage
brokers.
D. In 2004, neither building societies nor credit unions used
mortgage brokers.
Answer: C
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. Since the early 1990s the ROA of building societies and credit
unions has declined due to a decrease in lending margins.
B. Since the early 1990s the ROA of building societies and credit
unions has risen due to an increase in lending margins.
C. Since the early 1990s the ROA of building societies and credit
unions has declined due to a decrease in funding costs.
D. Since the early 1990s the ROA of building societies and credit
unions has remained relatively constant due to stable lending
margins.
E. Since the early 1990s the ROA of building societies and credit
unions has remained relatively constant due to stable funding costs.
Answer: A
Level of difficulty: 3

[QUESTION]
Which of the following statements is true?
A. Australia’s current financial regulatory system has its origins in
the late 1990s’ Financial System Inquiry, commonly known as the
Campbell Committee.
B. Australia’s current financial regulatory system has its origins in
the late 1990s’ Financial System Inquiry, commonly known as the
Wallis Committee.
C. Australia’s current financial regulatory system has its origins in
the late 1990s’ Financial System Inquiry, commonly known as the
Martin Committee.

Test bank t/a Financial Institutions Management by Lange & Saunders et al 1-7
D. Australia’s current financial regulatory system has its origins in
the late 1990s’ Financial System Inquiry, commonly known as the
Valentine Committee.
Answer: B
Level of difficulty: 1

[QUESTION]
The current financial system in Australia consists of three major
agencies, these being:
A. APRA, ASIC and the Australian Government.
B. APRA, the RBA and the Australian Government.
C. APRA, ASIC and the RBA.
D. The RBA, ASIC and the Australian Government.
Answer: CLevel of difficulty: 1

[QUESTION]
Which of the following statements is true?
A. APRA stands for Australian Prudential Regulation Authority.
B. APRA stands for Australian Payments Regulation Association.
C. APRA stands for Australian Payments Review Authority.
D. None of thegiven answers.
Answer: A
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. APRA is responsible for market integrity and consumer protection
across the financial system.
B. The RBA is responsible for prudential supervision.
C. ASIC is responsible for monetary policy and for overall financial
system stability.
D. APRA is responsible for market integrity and consumer protection
across the financial system and ASIC is responsible for monetary
policy and for overall financial system stability.
E. None of the given answers.
Answer: E
Level of difficulty: 3

[QUESTION]
APRA’s aim is to develop prudential policies that:
A. Promote financial safety and efficiency and that enable smaller
institutions to put competitive pressures on larger institutions.
B. Balance financial safety and efficiency, competition
contestability and competitive neutrality.
C. Promote financial system stability and fair interest rates.
D. Protect consumers from predatory behaviour of financial
institutions.
E. All of the given answers.
Answer: B
Level of difficulty: 3

[QUESTION]
Which of the following statements is true?
A. When issued trading can expose FIs to future interest rate risk.
B. When issued trading can expose FIs to future credit risk.
C. When issued trading can expose FIs to future liquidity risk.
D. When issued trading can expose FIs to future default risk.
Answer: A
Level of difficulty: 3

[QUESTION]

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Some prudential standards issued by APRA include regulations
regarding:
A. Capital adequacy for market risk and liquidity.
B. Credit quality and capital adequacy for credit risk.
C. Large exposures and funds management and securitisation.
D. The measurement of capital and equity associations.
E. All of the given answers.
Answer: E
Level of difficulty: 2

[QUESTION]
Which of the following statements is true?
A. The Financial Services Reform Act is the outcome of the CLERP6
consultation process.
B. The Financial Services Reform Act aims to bring flexibility and
simplicity to the licensing of group structures.
C. The Financial Services Reform Act aims to bring flexibility and
simplicity to the delivery of financial services.
D. The Financial Services Reform Act is the outcome of the CLERP6
consultation process and the Financial Services Reform Act aims to
bring flexibility and simplicity to the licensing of group
structures.
E. The Financial Services Reform Act is the outcome of the CLERP6
consultation process and the Financial Services Reform Act aims to
bring flexibility and simplicity to the delivery of financial
services.
F. The Financial Services Reform Act is the outcome of the CLERP6
consultation process, the Financial Services Reform Act aims to bring
flexibility and simplicity to the licensing of group structures and
the Financial Services Reform Act aims to bring flexibility and
simplicity to the delivery of financial services.
Answer: F
Level of difficulty: 3

[QUESTION]
Which of the following are components of the FSR Act?
A. Regulations of financial products according to financial
institution size.
B. Financial service provider conduct and disclosure.
C. Licensing of financial services.
D. Licensing of financial products.
E. All of the given answers.
Answer: B
Level of difficulty: 2

True/False

[QUESTION]
Depository institutions are financial institutions that only take
deposits from savers, but do not lend money to borrowers.
A. True
B. False
ANSWER: B
[QUESTION]
Non-bank depository institutions are also referred to as thrifts.
A. True
B. False
ANSWER: A

[QUESTION]

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In case of building societies, the members are usually linked to the
society by some common bond such as locality or trade union.
A. True
B. False
ANSWER: B

[QUESTION]
A financial institution is an institution that performs financial
intermediary services and/or services requiring transactions in the
capital markets.
A. True
B. False
ANSWER: A

[QUESTION]:
Most foreign banks have succeeded in establishing a well-developed
and profitable retail banking network in Australia.
A. True
B. False
ANSWER: B

[QUESTION]
By accepting a bill drawn by a borrower, a bank guarantees payment of
the face value of the bill to the holder of the bill at maturity.
A. True
B. False
ANSWER: A

[QUESTION]
During the 1960s and 1970s, the growth of credit unions ensured an
increasing supply of funds for housing loans at reasonable rates,
while the building society expansion ensured the availability of
relatively low cost unsecured and secured personal loans.
A. True
B. False
ANSWER: B

[QUESTION]
By using mortgage brokers credit unions and building societies were
able to diversify geographically, thereby strengthening their asset
portfolios.
A. True
B. False
ANSWER: A

[QUESTION]
The return on equity measures the combined effect of an FI’s ability
to generate net income on its total assets, and the extent to which
assets of the FI are funded with equity relative to debt.
A. True
B. False
ANSWER: A

[QUESTION]
ASIC stands for Australian Society of Inter-bank Cooperation and ASIC
is responsible for market integrity and consumer protection across
the financial system.
A. True
B. False
ANSWER: B

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Short answer/Essay

[QUESTION]
Based on the following information calculate the overall return on
equity of the FI and also break the return on equity into its
different components. Ensure you explain what the different ratios
measure:
Assets Liabilities and Equity capital
$1000 in loans $900 in deposits
$100 in equity capital
Total asset value $1,000 Total liability and equity
capital value $1,000

Net income $20

Total operating income $100

[QUESTION]:
Explain the Post Wallis Inquiry regulatory framework in Australia.

[QUESTION]:
Compare and contrast credit unions, building societies and financial
institutions.

Test bank t/a Financial Institutions Management by Lange & Saunders et al 1-11